Samantha Smoothie's utility function is U(c₁, c₂)= c₁c₂, where c₁ is her consumption in period 1 and c₂ is her consumption in period 2.She earns $200 in period 1 and $220 in period 2.Samantha can borrow and lend at an interest rate of 10% and there is no inflation.The number of dollars that Samantha spends in the second period must be A)more than 200 but less than 220. B)exactly 220. C)more than 220. D)exactly 200. E)less than 200.

Question

Quizplus · Accepted Answer

Given the interest rate of 10%, if Samantha saves any amount of her $200 income from period 1, she will have more than her period 2 income of $220 due to the interest earned. Conversely, if she borrows against her future income, she will need to repay more than she borrows due to the interest, leading to spending more than $220 in period 2 to cover her borrowing and interest costs.

Samantha Smoothie's Utility Function Is U(c1, C2)= C1c2, Where C1

Samantha Smoothie's Utility Function Is U(c₁, C₂)= C₁c₂, Where C₁